Why do most startups fail? There are many reasons, but one of the most significant lies in how venture capital funds operate. A VC fund raises money from investors, typically large institutions like pension funds and insurance companies, with the promise of returning that investment within seven to ten years at a profit of over 10% per year, or roughly two to three times the original amount. If a fund raises $1 billion, it must return $2 to $3 billion to its investors within that timeframe.

It’s worth noting that this is a cash return, real money, not shares in private, non-trading companies. This is precisely why venture capital funds push their portfolio companies to grow at breakneck speed, moving from initial idea to exit within a fixed and relatively short window. VC funds typically only invest in new companies during the first two to three years of the fund’s life, which means the average time between initial investment and exit is compressed to around six years.

There are two types of exits, going public or selling the company to another entity in exchange for cash or publicly traded shares. To be listed on a leading stock exchange like the NASDAQ or NYSE, a company must meet a number of criteria: annual sales of $100 million or more, rapid growth of 50% per year over the past three years, and a large and expanding addressable market. In recent years, investors have become less strict about some of these requirements, but the fundamental pressure remains.

Venture capital funds are essentially looking for meteors, companies that appear out of nowhere and rocket to a public listing in just a few years. These success stories are well known. The problem is that when you’re starting from scratch and have roughly six years to pull it off, only one in ten companies will make it.

The pressure to grow at an accelerated pace in a short time creates enormous strain on companies, pushing them to accomplish what is often an impossible task. To meet these demands, companies raise tens of millions of dollars, pouring fuel on the fire, which in most cases still doesn’t guarantee a faster path to exit. It’s like handing entrepreneurs a race car and demanding they drive from Jerusalem to Tel Aviv in 15 minutes. The chances of crashing somewhere along the way are high. And this is one of the primary reasons nine out of ten startups fail.

For investors, a failed portfolio company is an unfortunate but expected reality, just part of the statistics. For founders, it’s anything but statistical. They have one company, they’ve spent years building it, they’ve recruited employees they spend more time with than their own families, and when it fails, it’s personal and painful.

It doesn’t have to be this way. By shifting a company’s goals and how success is measured, we can significantly improve the odds. The core idea is to focus on reaching profitability quickly, rather than chasing sales growth at any cost.

When a company starts making money instead of burning it, it naturally transitions from childhood to adulthood. It proves that its product or service is worth more than the cost of building and marketing it, that there are enough customers willing to pay full price, and that the company has learned to manufacture, market, sell, and support its product efficiently and profitably. That becomes the company’s DNA, and from there, it will continue to grow rapidly and generate more and more cash.

A profitable company no longer needs constant outside support. It stands on its own. Management can turn its full attention to the market, to customers, to their needs, and to new opportunities, instead of spending time pitching to potential investors. In other words, profitability means managerial freedom.

In the posts that follow, we’ll explore the principles and steps for building a profitable company, and how it can be done incrementally with a relatively modest investment, what is today called seed financing. In my experience, it is entirely possible to build a profitable, fast-growing company within three to four years on an investment of three to five million dollars.